Well, that was the line that Spanish Economy Minister Luis de Guindos was spinning yesterday. Sorry Luis, this is essentially a Spanish rescue - external funding sources filling a gap which the state can't (check), monitoring of a large chunk of the economy (check), involvement of all the big international organisations (check - EU, IMF, ECB etc.), the list goes on.
Meanwhile, the oft absent Spanish Prime Minister Mariano Rajoy held a press conference today, declaring the package a 'victory' for the euro
and stating that if it were not for the current government's reforms it
would have been a full bailout package. If this is a victory (finally
dealing with a glaring problem after four years) then we don't want to
see a defeat, but at least Rajoy made a public appearance this time.
That said, in the midst of the worst crisis his country has faced since
the financial crisis hit, Rajoy is now jetting off Poland to watch Spain
vs. Italy (a mouth watering prospect admittedly but his timing could
take some work), while the likes of the Education Minister are heading
to Roland Garros to watch Rafael Nadal - the Spanish government not
quite in crisis mode then, we're not sure if that should inspire
confidence or not...
In any case, as we predicted over two months ago, European assistance to help Spain deal with its banks is now official, so what
does this rescue mean for Spain and the eurozone, below we outline some
of the key points and our take:
Spain will access a loan from the EFSF/ESM (the eurozone bailout funds)
which it will use to recapitalise its ailing banking sector. The money
will be channelled through the FROB (the bank restructuring fund) but
will still be a state liability (it will not go directly to the banks).
However, unlike the other bailouts it will not come with fiscal
conditions but only conditions for reforming the financial sector.
Open Europe take:
Firstly, the ESM will not be in place in time to provide the loan (the
treaty is yet to be ratified by numerous countries and has faced many
delays) so at least initially it will come from the EFSF. As others have
pointed out, this is important because ESM loans are senior to other
types of Spanish debt while EFSF loans are not. This may make things
easier to start with (as it removes the threat of legal challenges based
on clauses in other Spanish sovereign debt which could be triggered if
it suddenly became junior), however, Finland has already raised concerns
over its exposure and role in the rescue - an issue we tackle in more
The lack of additional fiscal conditions is fair given that Spain is
already subject to a deficit reduction programme and that this is
ultimately a financial sector problem. There are questions over
conditionality and moral hazard though - we would like to see bank
bondholders and shareholders sharing more of the burden (bail-ins) to
ensure the necessary reforms take place. As things stand its hard to see
how the banks will 'pay' for this capital, particularly given the
Spanish regulators previous failures (during and after the property
De Guindos confirmed that the funds would be counted as Spanish debt, so
Spanish debt to GDP could be about to jump by 10% in the near future
and given its current path this could put Spain over 90% debt to GDP
(the level beyond which sustainability becomes questionable) much sooner
than had been anticipated. This will require adjustments in its reform
programme and lead to increasing market pressure.
Size - is it enough?
This is the key question - the total amount has been put at "up to"
€100bn. That is much higher than was suggested by the IMF assessment
released on Friday night, which suggested €40bn.
Open Europe take:
It sounds like a big number, but upon closer inspection it may not
stretch as far as many expect. Consider that Bankia requires €19bn,
while three other very troubled cajas need around €30bn (Banco de
Valecia, Novagalicia and Catalunya Caixa) meaning half the money could
already be eaten up, leaving only €50bn for the rest of the huge banking
This compares to around €140bn in doubtful loans, and a total €400bn
exposure to the bust real estate and construction sector. Doubtful loans
to this sector total around €80bn currently, but we expect house prices to fall by a further 35%, broadly meaning that the number of doubtful
loans could easily double. On top of this we have further losses on
mortgage loans as well as losses on other corporate debt and a decrease
in the value of Spanish debt held by banks. So huge number of issues -
putting a clear figure on it is difficult due to the difference between
tier one capital and 'loss provisions' (tier two capital). But even if
this €50bn is given in tier one capital and stretched to increase
provisions its hard to see that it will be enough given the huge
exposure to mortgages and the bust sectors, especially at a time when
growth is falling further and unemployment continues to rise.
Finland and Ireland - flies in the ointment?
If the EFSF is used (which looks likely) the Finnish government is
obliged to ask for 'collateral' as it did with Greece - the noises coming out of Finland suggest it will, especially given its objection to
'small' countries bailing out 'larger' ones. Ireland has also suggested
that if Spain is able to avoid fiscal conditions on its bank bailout
then it could request similar treatment (i.e. a loosening of
Open Europe take:
The Finland issue will get messy, as it did in Greece. It will add
another complex layer to negotiations, while politically it will help
the (True) Finns who are already launching a campaign against further
bailouts. It could also lead to legal challenges - as we pointed out with Greece, it could trigger 'negative pledge' clauses on Spanish bonds
given that they essentially become subordinated to Finland's claim on
Spain. Not guaranteed, but a legal grey area which adds to the
As for Ireland, they have a fairly strong case here. Ultimately, their
fiscal troubles stemmed from bailing out their banks, something Spain is
now able to dodge thanks to external help. Ireland already feels that
it is paying a huge price for protecting the European banking system -
this will only add to this ill feeling. Given Ireland's perceived
'success' in Germany some flexibility may be forthcoming but we doubt
enough to assuage Irish anger.
Impact on the UK?
The IMF will only play a 'monitoring' role, meaning the UK will not be
liable for the money provided to Spain. However, given the links between
the UK and Spanish banking systems it is imperative that the problems
in the Spanish financial sector are finally dealt with - whether that
will happen this time around is yet to be seen but given the points
above it is not off to a great start.
Impact on the eurozone - Open Europe concluding remarks:
Markets responded positively to rumours of external aid for Spain on
Friday afternoon, but, given the points above, a huge amount of
uncertainty remains which will keep markets jittery and increase
pressure on the eurozone. That is far from needed given the uncertainty
surrounding the Greek elections. Given the ongoing assessment of the
actual needs of Spanish banks the rescue will now enter a state of limbo
as attention turns back to Greece, in the meantime Spain is likely to
find it difficult to access the market (since this is broadly an
admission it cannot raise any substantial funds itself).
Questions will also arise over the strength of the eurozone bailout
funds - Spain guarantees around 12% of them, surely its guarantees are
now worthless or would do more harm than good. Additionally, now that
one of the larger countries has asked for support pressure will
intensify on Italy (particularly with the falling support for the
technocratic government and the slow pace of reform).